Lehman Teaches Valuable Lesson to In-House Counsel

As the U.S. financial markets melted down in 2008, I wondered how the in-house legal teams at the Wall Street firms were able to manage the immense internal and external pressures bearing down upon them. My curiosity involved abstract appreciation of the chaotic conditions under which the in-house teams operated. The examiner in the Lehman Brothers' bankruptcy, however, recently issued a detailed account of the storm that heralded Lehman's demise (See "Blaming Lehman"). The report, including its copious citation of e-mails reflecting management's frantic response to the crisis, permits in-house counsel to reflect upon how we would have handled our jobs amid that tempest.

In January 2008, Lehman's market capitalization was pegged at more than $30 billion; less than eight months later, Lehman sought bankruptcy protection. Although the bankruptcy examiner cited several reasons for Lehman's collapse, he concluded that its troubles were "exacerbated by Lehman's executives, whose conduct ranged from serious but nonculpable errors of business management to actionable balance sheet manipulation." The examiner concluded that "colorable claims" exist against several officers who were allegedly responsible for the balance sheet management and who signed and certified Lehman's financial statements.

The examiner's report does not specifically take issue with the Lehman legal department's response to the crisis or its efforts to stave off Lehman's demise. Still, in-house counsel should use this detailed case study to assess our readiness to manage our ethical obligations amid corporate crisis. The examiner's meticulous report permits us to feel the perfect storm beating down upon Lehman. As the report specifies, Lehman deployed several survival strategies including enhanced use of an accounting "gimmick" that was designed solely to shore up Lehman's balance sheet. Lehman did not disclose the use of the questionable--but not illegal--accounting practices in its periodic reports and, according to the examiner, the lack of transparency misled the public and was actionable.

How might we conduct ourselves from the eye of that storm? No doubt, challenging business environments breed risky business practices. In Lehman's case, the business was in a death spiral. Could you oppose life support when your client is dying? Do ethics and codes of conduct even play a role in that environment?

Our code of conduct makes no exception for really difficult situations. In fact, Model Rules of Professional Conduct 1.6 (confidentiality of information) and 1.13(b - c) (up-the-ladder reporting) only address serious misconduct, not simply unwise business decisions. Indeed, a comment to Rule 1.13 clarifies that a lawyer's business judgment should not replace that of the constituents:

"When constituents of the organization make decisions for it, the decision ordinarily must be accepted by the lawyer even if their utility or prudence is doubtful. Decisions concerning policy and operations, including ones entailing serious risk, are not as such in the lawyer's province."

Still, if the conduct--whether it is part of a survival strategy or not--involves serious misconduct that will likely result in substantial injury to the client, then we are expected to respond in some way, regardless of the pressures to participate or look away. We are expected to be pillars of ethical behavior even if those around us are blinded or distracted by the exigencies.

Do you have the courage to stand against indescribable pressure by your business partners to acquiesce to or participate in inappropriate business practices? Read the Lehman bankruptcy examiner's report and place yourselves in the eye of the storm that besieged Lehman. Gut check time.